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on to suggest that their problem wasn’t at all the bad loans they had made but the panic in the market. The Merrill Lynch memo listed a number of possible responses the Irish government might have to any run on Irish banks. It refrained from explicitly recommending one course of action over another, but its analysis of the problem implied that the most sensible thing to do was to guarantee the banks. After all, the banks were “fundamentally sound.” Promise to eat all losses, and markets would quickly settle down—and the Irish banks would go back to being in perfectly good shape. As there would be no losses, the promise would be free.

What exactly was said in the meeting on the night of September 29, 2008, remains, amazingly, something of a secret. The government has refused Freedom of Information Act requests for the notes taken by participants. Apart from the prime minister and the bank regulators, the only people at the conference table inside the Ministry of Finance were the heads of the two yet-to-be disgraced big Irish banks: AIB and Bank of Ireland. Evidently they either lied to Brian Lenihan about the extent of their losses or didn’t know themselves what those were. Or both. “At the time they were all saying the same thing,” an Irish bank analyst tells me. “‘We don’t have any subprime.’” What they meant was that they had avoided lending to American subprime borrowers; what they neglected to mention was that, in the general frenzy, all of Ireland had become subprime. Otherwise sound Irish borrowers had been rendered unsound by the size of the loans they had taken out to buy inflated Irish property. That had been the strangest consequence of the Irish bubble: to throw a nation that had finally clawed its way of out centuries of indentured servitude back into indentured servitude.

The report from Merrill Lynch asserting that the banks were “fundamentally sound” buttressed whatever story the banks told the finance minister. The Irish government’s bank regulator, Patrick Neary, had echoed Merrill’s judgment. Morgan Kelly was still a zany egghead; at any rate, no one who took him seriously was present in the room. Anglo Irish’s stock had fallen 46 percent that day; AIB’s had fallen 15 percent; there was a fair chance that when the stock exchange reopened one or both of them would go out of business. In the general panic, absent government intervention, the other banks would have gone down with Anglo Irish. Lenihan faced a choice: Should he believe the people immediately around him or the financial markets? Should he trust the family or the experts? He stuck with the family. Ireland gave its promise. And the promise sank Ireland.

EVEN AT THE time, the decision seemed a bit odd. The Irish banks, like the big American banks, managed to persuade a lot of people that they were so intertwined with their economy that their failure would bring down a lot of other things, too. But they weren’t, at least not all of them. Anglo Irish Bank had only six branches, no ATMs, and no organic relationship with Irish business except the property developers. It lent money to people to buy land and build: that’s all it did. It did this with money it had borrowed from foreigners. It was not, by nature, systemic. It became so only when its losses were made everyone’s.

In any case, if the Irish wanted to save their banks, why not guarantee just the deposits? There’s a big difference between depositors and bondholders: depositors can flee. The immediate danger to the banks was that savers who had put money into them would take their money out, and the banks would be without funds. The investors who owned the roughly 80 billion euros’ worth of Irish bank bonds, on the other hand, were stuck. They couldn’t take their money out of the bank. And their 80 billion euros very nearly exactly covered the eventual losses inside the Irish banks. These private bondholders didn’t have any right to be made whole by the Irish government. The bondholders didn’t even expect to be made whole by the Irish government. Not long ago I spoke with a former senior Merrill